When I read articles such as this one, Taxing Financial Transactions: Heading for an Own Goal, I sometimes despair. Both for the policy that is proposed and for how the various interested parties for or against a policy cloud their judgement. I really have to ask, “What are you trying to accomplish?”
Taxing financial transactions has long been proposed as a way of putting a brake on volatile financial markets, curbing speculation, and bringing in some revenue. In September last year the European Commission published a draft of a directive that would set the levy at 0.1% on cash and securities transactions and 0.01% on derivatives, reckoning that the annual revenue could be as much as €57 billion ($XX billion).
One of the primary factors of the global financial crisis was that banks and other assorted financial institutions implicitly believed that, at the end of the day, governments would step behind them and bail them out. This was the case with Bear Stearns, when the Fed/Treasury Dept/Government orchestrated its sale to JP Morgan to stave off disaster in March 2008. When faced with the same situation 6 months later with Lehman, Paulson and Geithner elected not to stand behind the firm in a sale transaction, scaring off potential suitors like Barclays and leaving the firm to fend for itself. Lehman couldn’t, declared bankruptcy and, ultimately, pieces of Lehman went to the various suitors.
The tsunami of shitstorm that decision unleashed led to TARP, Goldman and Morgan Stanley converting to traditional bank holding companies, etc. Across the pond, England faced the same situation with RBS, the Irish with their bad banks, etc.
Its clearly evident that the taxpayers would be bailing out these big financial institutions and, since then, policy makers have been trying frantically to figure out to avoid this situation. In the parlance, they were trying to disincentivize financial institutions from taking on these risks and get the taxpayer off the hook of these potential liabilities. Clearly, letting firms fail was not the desired mechanism. One of the suggestions was to levy a financial transaction tax, like the one above that will potentially raise 57 billion euros per year.
The urgency to introduce an FTT is partly inspired by the need for revenue. Now that governments have committed billions to rescuing one euro-zone country, or banking sector, after another, there is an even more acute need for cash.
While this money will surely help repair balance sheet damage caused as a result of the last few years’ worth of bailouts, does it not create a justification for future bailouts? This tax is akin to banks paying an insurance premium and when shit hits the fan, they can now come cap in hand to the government for bailouts. I’m half-convinced this has the potential to incentivize financial institutions to take on increased risk, not less. The hitherto implicit belief that governments would stand ready to bail out TBTF institutions will now become explicit. Does it not, then, accomplish the opposite of “putting a brake on volatile financial markets, curbing speculation?”
Certainly if my bank was about to go under, I would go cap in hand to government and point to all the dough they’ve collected as the honeypot with which to bail me out, especially as the honey was collected for paying for my mistakes.
Interestingly, I’ve come to view Canada as a land lost in time, where the rules of economics still apply and the rest of the world has gone bizarro. Not coincidentally, I believe it was the only G8 member to actively lobby against this kind of tax (and maybe Australia).